Determining IR35 status for contractors

What is IR35?

IR35 is a tax legislation in the UK that was introduced to prevent tax avoidance by individuals who work through their own limited companies (often referred to as “personal service companies” or “PSCs”) but who, in practice, operate as if they were employees of the clients they work for.

Under IR35, if a contractor is deemed to be working “inside” IR35, then they are treated as an employee for tax purposes and are subject to the same income tax and national insurance contributions as an employee would be. This means that the client company who engages the contractor would need to deduct income tax and national insurance contributions from the contractor’s fees and pay them to HM Revenue & Customs (HMRC).

To determine whether a contractor is inside or outside IR35, the client company must undertake an employment status assessment. This involves looking at the working relationship between the contractor and the client, as well as the terms and conditions of their engagement, to determine whether the contractor is genuinely self-employed or whether they are effectively an employee of the client.

How do you assess IR35 status of contractors?

Some of the key factors that are considered in an employment status assessment include:

  1. the level of control that the client has over the contractor’s work
  2. whether the contractor is required to provide their services personally (i.e. they cannot send a substitute)
  3. whether the contractor is entitled to any employment benefits such as sick pay or holiday pay

If the contractor is found to be inside IR35, then the client company will need to deduct income tax and national insurance contributions from their fees and pay them to HMRC. The client will also be responsible for paying employer’s national insurance contributions on top of the contractor’s fees.

It is important for client companies to keep records of their employment status assessments and any communication with contractors about their IR35 status. This is because HMRC can investigate and challenge the status determination, and having a clear record of the assessment process and reasoning can help to demonstrate compliance with the legislation.

What if a contractor is engaged through a recruitment agency?

If a client is using a recruitment agency to engage with a contractor, the responsibility for determining the contractor’s IR35 status and deducting the appropriate taxes will depend on the contractual arrangements between the client, the recruitment agency, and the contractor.

Typically, the recruitment agency will act as the intermediary between the client and the contractor, and will be responsible for determining the contractor’s IR35 status and deducting the appropriate taxes if the contractor is deemed to be inside IR35. The client may still have a role to play in providing information to the recruitment agency about the nature of the work and the contractual arrangements, but ultimately it will be the responsibility of the recruitment agency to make the status determination.

It’s important for all parties involved to be aware of their responsibilities under the IR35 legislation and to have clear contractual arrangements in place that reflect these responsibilities. Client companies should ensure that they are engaging with reputable recruitment agencies that have a good understanding of the IR35 rules and are taking appropriate steps to comply with them. Additionally, all parties should keep clear records of the employment status assessment and any communication related to the IR35 status determination, in case of any future investigation by HMRC.

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